Although the dividend tax calculator is beneficial at tax time, it’s a tool you can use anytime. For example, you can use it when deciding between two dividend stocks to add to your portfolio.
Outside of a tax-advantaged account such as a 401(k), you must report the passive income you receive from dividends on your taxes. You can avoid getting hit with a nasty surprise when you file your taxes by using MarketBeat’s dividend tax calculator. Let’s take a look at taxes and dividends in more depth.
What are dividends?
Dividends are a share of a company's earnings (i.e., profits) that a company pays to shareholders. Dividend-paying companies are typically at a mature phase in their business cycle. "Mature phase" means they generate earnings sufficient to meet their current and future capital expenditures. When this happens, it's customary, but not mandatory, for companies to issue dividends to build shareholder equity.
Investors familiar with Warren Buffett likely know about the Oracle of Omaha's fondness for dividend stocks. One of the signature names in his portfolio is The Coca-Cola Company (NYSE: KO). There are many good reasons for that, not the least of which is that Coca-Cola is a Dividend King, which means it has increased its dividend for at least 50 consecutive years. Coca-Cola's streak has lasted 61 years as of December 2022.
Investors wouldn't accuse Coca-Cola of being a company that isn't growing. Still, it generates such massive revenues combined with healthy profit margins that its ample earnings allow it to meet its expenses and still reward investors with dividends.
Another company in Buffett's portfolio, Apple Inc. (NASDAQ: AAPL), pays a relatively small dividend even though the company generates significant amounts of cash. In this case, investors expect Apple to continue spending on research and development (R&D) so that the company can continue to bring innovative products to market. If the company were to increase its dividend significantly, some growth would be in jeopardy. However, Apple has increased its dividend for 11 years as of December 2022.
Many investors receive their dividends as regular payments that they can use to meet current expenses. However, more investors choose to reinvest their dividends, which means that the dividends flow into their brokerage account and immediately buy shares (and/or partial shares) of the company's stock. Not only does this increase your total return on a stock, but you also benefit from compound interest, which is one of the primary benefits of investing.
Compound interest (which Alfred Einstein described as the eighth wonder of the world) is the interest calculated on a principal balance over a period of time. You benefit from the current interest on the principal and all the interest accumulated in the previous period. Dividend payments are a form of interest you receive for owning a stock.
How Are Dividends Taxed?
Because you receive dividends as passive income (meaning you are not putting up your own money to receive the payment), it's not unusual to ask, "Do you pay taxes on dividends?"
The answer is yes. The dividend tax rate differs depending on whether your dividends are qualified or nonqualified.
Most dividends are qualified dividends. To know for sure, you can look at Form 1099-DIV, which you'll receive from each company that you receive dividends of more than $10 per calendar year. Even if you do not receive a Form 1099 or a Schedule K-1, you are responsible for reporting all taxable dividends on your tax return.
The qualified dividend tax rate is the same as the current long-term capital gain rate. Nonqualified dividends are taxed at ordinary income tax rates.
However, you should note that many nonqualified dividends come from companies with business models requiring them to pay a high percentage of their earnings as dividends. The size of the dividend may offset the fact that it will be taxed as ordinary income. Talk to your tax advisor to learn more.
Qualified vs. nonqualified dividends definition
The difference between a qualified and nonqualified dividend depends on the tax treatment each receives. As noted above, most dividends are qualified dividends, which are taxed at the current long-term capital gain rate. Whether you have qualified or nonqualified dividends can significantly impact your total return and your ability to build wealth over time.
Qualified dividends must meet specific criteria:
- Dividends must be paid by a U.S. company or a foreign company that gets an advantage from a U.S. tax treaty and meets the other criteria.
- The dividend must not exist under the list of "not qualified dividends."
- You fulfill the requirements for the holding period. For qualified dividends, this means you own the stocks for more than one year.
By contrast, a nonqualified dividend is one listed on the list of "not qualified dividends," or it meets other criteria, including:
- The dividend is paid out by a company that operates as a real estate investment trust (REIT) or master limited partnership (MLP).
- The dividend comes from a foreign company that does not form part of the United States tax treaty or is not listed on a U.S. stock market (e.g., NYSE or NASDAQ).
- The dividend pays out as part of an employee's stock options.
- Some special dividends/one-time dividends are nonqualified.
- The dividend doesn't meet the holding period requirement set by the IRS.
Qualified dividend tax rates for the 2024 tax year
The amount that you’ll pay for your dividend tax dues in 2024 will vary depending on how you’re filing your taxes as well as how much taxable income you earned in 2023. To calculate qualified dividend tax rates for 2024, use the following steps:
- Identify all qualified dividend income using the criteria outlined in the section above. Keep your brokerage statements handy to quickly cross-reference purchase date and dividend income information.
- Add all qualified dividend income together.
- Calculate your total taxable income for 2023 and note how you’ll be filing this year.
- Use the chart below to determine your long-term capital gains tax rate, which is how you’ll pay taxes on income generated from long-term securities you hold.
|
Long-term capital gains rate (longer than one year)
|
| |
0%*
|
15%*
|
20%*
|
|
Single
|
$0 - $44,625
|
$44,625 - $492,300
|
$492,301 +
|
|
Married filing jointly and surviving spouse
|
$0 - $89,250
|
$89,250 - $553,850
|
$553,851 +
|
|
Head of household
|
$0 - $59,750
|
$59,750 - $523,050
|
$523,051 +
|
|
Married filing separately
|
$0 - $44,625
|
$44,625 - $276,900
|
$276,901 +
|
|
Trusts and estates
|
$0 - $3,000
|
$3,000 - $14,650
|
$14,650 +
|
* Determine your capital gain bracket by adding your net long-term capital gains and/or qualified dividends to your other taxable income net of deductions.
Nonqualified dividend tax rates for the 2024 tax year
Any dividend income that you receive that does not meet the qualification criteria is considered non-qualified, and is classified in the same way as any other income you earn for the year. Nonqualified dividend income is essentially the same thing as receiving a 1099 tax form equal to the amount that your investments produced. For most taxpayers, its advantageous to hold investments for longer periods of time to enjoy qualified dividend rates because this results in a lower effective tax rate.
To calculate tax on nonqualified dividend income, use the following steps:
- Calculate all taxable income for the year; include nonqualified dividend income in this figure.
- Using the chart below, calculate your total income tax due on standard income earned in 2023.
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Filing Status
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Married taxpayer filing jointly/ surviving spouse
|
Single
|
Head of household
|
Married filing separately
|
|
If taxable income* is:
|
$0 - $22,000
|
$0 - $11,000
|
$0 - $15,700
|
$0 - $11,000
|
|
Tax is:
|
10%
|
10%
|
10%
|
10%
|
|
If taxable income* is:
|
$22,001 - $89,450
|
$11,001 - $44,725
|
$15,701 - $59,850
|
$11,001 - $44 ,725
|
|
Tax is:
|
($2,200 + 12% of excess over $22,000)
|
$1,100 + 12% of excess over $11,000
|
$1,570 + 12% of excess over $15,700
|
$1,100 + 12% of excess over $11,000
|
|
If taxable income* is:
|
$89,451 - $190,750
|
$44,726 - $95,375
|
$59,851 - $95,350
|
$44,726 - $95,375
|
|
Tax is:
|
($10,294 + 22% of excess over $89,450)
|
$5,147 + 22% of excess over $44,725
|
$6,868 + 22% of excess over $59,850
|
$5,147 + 22% of excess over $44,725
|
|
If taxable income* is:
|
$190,751 - $364,200
|
$95,376 - $182,100
|
$95,351 - $182,100
|
$95,376 - $182,100
|
|
Tax is:
|
$32,580 + 24% of excess over $190,750
|
$16,290 + 24% of excess over $95,375
|
$14,678 + 24% of excess over $95,350
|
$16,290 + 24% of excess over $95,375
|
|
If taxable income* is:
|
$364,200 - $462,500
|
$182,101 - $231,250
|
$182,101 - $231,250
|
$182,101 - $231,250
|
|
Tax is:
|
$74,208 + 32% of excess over $364,200
|
$37,104 + 32% of excess over $182,100
|
$35,498 + 32% of excess over $182,100
|
$37,104 + 32% of excess over $182,100
|
|
If taxable income* is:
|
$462,501 - $693,750
|
$231,251 - $578,125
|
$231,251 - $578,100
|
$231,251 - $346,875
|
|
Tax is:
|
$105,664 + 35% of excess over $462,500
|
$52,832 + 35% of excess over $231,250
|
$51,226 + 35% of excess over $231,250
|
$52,832 + 35% of excess over $231,250
|
|
If taxable income* is:
|
$693,751 or more
|
$578,126 or more
|
$578,101 or more
|
$346,876 or more
|
|
Tax is:
|
$186,601.50 + 37% of excess over $693,750
|
$174,238.25 + 37% of excess over $578,125
|
$172,623.50 + 37% of excess over $578,100
|
$93,300.75 + 37% of excess over $346,875
|
* Taxable income is income after all deductions (including either itemized or standard deductions).
Example of using the MarketBeat Dividend Tax Calculator
MarketBeat offers several tools that can help make you a more informed and profitable investor, including our free calculator tools to help you find the best dividend stocks for your portfolio.
To use the dividend tax calculator:
- Enter the amount of your qualified and nonqualified dividends. If you don’t yet own the stock, you can estimate the amount of the dividend you’ll receive. Go to the profile page for that stock on MarketBeat.com and click on the “Dividend” tab. You’ll see the current annual payout per share. If you plan to hold the stock for a year, you can multiply that number by the number of shares you plan to own.
- If your income comes from a qualified dividend, enter your capital gains tax rate (see chart above). If you have no income from qualified dividends, put “0” in the “Qualified Dividend Income” field.
- If your income comes from a nonqualified dividend, enter your ordinary (i.e., marginal) income tax rate (see chart above). If you have no income that comes from nonqualified dividends, put “0” in the “Nonqualified Dividend Income” field.
For example, if you buy $10,000 of stock in Procter & Gamble Company (NYSE: PG) at $142.97 per share, you’ll own 69.9 shares of PG stock. ($10,000/142.97 = 69.9 shares).
The company pays a dividend of $3.65 per share. That puts your annual dividend at $255.29 ($3.65 x 69.9 = $255.29).
From there, you can figure out how much tax you would owe depending on your tax bracket. In the 15% tax bracket, you would pay $38.29 in taxes on your investment in PG stock (255.29 x 0.15 = $38.29).
In addition to the dividend tax calculator, you have free access to our dividend calculator, which calculates the future income power of your dividend investment portfolio. Our dividend yield calculator lets you calculate your dividend stock's current yield in real-time..
If you like those tools, get familiar with other MarketBeat calculators, such as our compound interest calculator, inflation calculator, investment calculator, and fundamental analysis tools, such as our market cap calculator and P/E ratio calculator.
How to minimize dividend taxes
Death and taxes, even taxes on dividends, are inevitable. There is no way for you to avoid paying taxes on your dividends at some point. However, if your dividend stocks are part of a retirement account such as a Roth IRA or 401(k), you can defer paying those taxes until you’re ready to take a withdrawal.
If you have qualified dividends, they are taxed as capital gains. That means you’ll only have to pay between 0% to 20% of your dividend income in taxes.
Use MarketBeat’s Dividend Tax Calculator
Dividend stocks are one of the best options if you want to grow wealth over time. Not only do they compound, but they act as a hedge against inflation. However, the dividend income you receive is taxable and the MarketBeat dividend tax calculator can help you understand your tax liability even before you own the stock.
FAQs
How much tax do you pay for dividends?
The amount of tax you’ll pay for your dividends depends on whether you have qualified or nonqualified dividends. Most dividends are qualified, which means they will be taxed the same as the current long-term capital gain rate. This has favorable benefits for investors in terms of building long-term wealth. Nonqualified dividends are taxed at ordinary income tax rates.
How do you avoid dividend tax?
You will have to pay taxes on your dividend income. However, if the dividends are included as part of a retirement account such as a Roth IRA or 401(k), you will only pay taxes once you take a distribution. Since qualified dividends are taxed at the long-term capital gains rate, you would only have to pay a maximum of 20% of your dividend income in taxes, depending on your tax bracket.
